Persuasion Time

Or maybe it’s “fear.”  Stock markets around the world took it on the chin today after investors began really worrying about European sovereign debt.  Yes, you might have heard that the European Union had approved a big bailout package for Greece, whose problems are well known, and had concluded (as did I) that Greece and all of its problems was already fully discounted by the markets.  Today’s new twist is the fear of contagion.  This is the “high concept” that one bad apple may indeed spoil the whole bunch.  If Greece can be driven to the brink, this concept muses, why not Spain, Portugal, and others?

Above all else, the stock market fears uncertainty.  Could Greece’s problems spread far, wide and deep?  Maybe.  I am no expert on sovereign debt or the Euro Zone, but I do know that many stocks I really like are now 2—4% cheaper than they were yesterday, without any change in their individual fundamentals.  I also know that corrections within the context of a bull market are normal and actually helpful – they help to prevent the kind of “irrational exuberance” that prevailed in the late 1990s.

This sudden rush of fear reminds me that we are still far away from universal bullishness on the U. S. stock market.  Investor psyches are still tender from the punishment inflicted upon them over the last few years.  Whenever anything negative develops, we tend to move immediately to a “what next?” mentality, as if every negative thing has to be the first of a series of bad events.  In normal times, a correction like we saw today would split opinions somewhere down the middle – half would urge caution and half would view it as a buying opportunity.  The fact that opinions appear to be highly skewed to the caution side this time around tells me that times are not yet “normal” and that much work still needs to be done for investors to fully embrace the new bull market.  That’s one of the key reasons I think it will continue.

My bottom line is that this is a buying opportunity.  I can’t predict that this correction will end in one day; it might last weeks or even months. But I do believe today’s action does not represent anything more than a normal pull back within the context of a bull market.  Time will tell.

This entry was posted on Tuesday, May 4th, 2010 at 2:16 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.